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Unjust Banking Practices in Swiss Franc Loan Agreements

The Cypriot banking system is currently being confronted with the issue of providing foreign loans and in particular Swiss francs to both locals and foreigners to cover their housing requirements. Of principle concern in Cypriot and European Courts are the banking practices used in attracting clients to these financial institutions. It seems that misinformation through the use of various means of bank notifications and practices point towards the use of the distortion and the concealment of essential information to borrowers. The Cypriot banking system (that is sanctioned by European banking) in the provision of Swiss Francs did not in most cases provide a complete and proper briefing of the risks involved in these types of loan contracts that also incorporated exchange and interest rate fluctuations.

The elements of a loan and in particular of foreign currency loans are subject to 2 principal factors: a) the currency exchange rate that will determine the content of the contract and the contractual obligations of the borrower against the bank and b) the variable interest rates (which include the type of Libor) and/or other interest rates.

The first factor (a) is significant in the agreement of the repayment of the loan since currency exchange rates affect loans when loans are provided in a currency that are dissimilar to the borrowers' currency of income. The loan varies and fluctuates (normally increases) when the borrower is unaware of the required payment amount of the monthly installment. However, many borrowers that had paid regularly and on time observed that their balances owed did not decrease but increased when compared to the original loan sum provided by their banks.

The second component relates to the interest rate profits of banks. Many of the banks pre-drafted contracts are determined on the type of interest and the interest rate amount. Therefore, borrowers should be particularly vigilant on the unfair terms contained in these types of agreements that impose conditions unfavourable for borrowers and are not clarified and/or explained by the banks. Unfair terms include interest rate fluctuations, interest on late payments and compound interests added by the banks. Interest rates dramatically affect the borrowers' liability owed to the bank and increases the loan amount owed to them.

Essentially borrowers were required to pay back twice or three times more on their original loans. It is therefore reasonable to question as to whether borrowers would have agreed to sign this type of agreement knowing the dangers and risks involved.

Commercial practices would be regarded as unfair/unjust if there is a distortion of facts and the suppression and/or disregard of crucial information for the sole purpose of convincing the other party to partake in an agreement without being aware of the real facts. Therefore, it could be considered as false representation, an error and/or fraud according to section 149 of the contract law. False information could be based on ignorance/lack of knowledge or purposely intended to effect the finalisation of an agreement.

The banks in the period between 2006 to 2012 promoted numerous Swiss Franc loans that were granted either to foreigners buying homes for investment purposes or to locals to fulfil their housing requirements.

Financial institutions upheld that borrowers would receive the rapid granting of their loans and low interest rates on the main â€˜Liborâ€™ type in contrast to the â€˜Euriborâ€™ imposed on other mortgage loans. This practice was encouraged by banks to attract more borrowers at a time when the Cypriot banks possessed enough liquidity to sell their products.

The bank during this period did not conform to the dictates of good faith and did not demonstrate due diligence towards their clients. Furthermore, there was an avoidance of informing clients on the exchange rate risks resulting from foreign currency credit that differed from their incomes and on the fluctuations of interest rates.

In recent years and in particular after the release of the Swiss Franc from the Central Bank of Switzerland the additional interest burden on loans have increased considerably for borrowers. Banking institutions were obligated to inform borrowers of these changes and its consequences since borrowers did not possess the specialised knowledge necessary to analyse the implications and negative turn of events involved in the release of the Swiss Franc from the Central Bank of Switzerland In addition, the loan agreements were prepared in a manner that did not safeguard the borrowers and contained unfair clauses, conditions and hidden terms in contravention of the provisions of the European Directive 93/13/EOK.

In the last 2 years in Cyprus, in and out of Court cases have progressed slowly but steadily with positive steps in favour of the borrowers based on a European orientation and in accordance with the amendments and establishment of new European directives and regulations. The start of vindicating the Swiss Franc borrowers was launched by the House of the Economic Council which prioritised judgement/opinion No. 56/23-11-2015 from the Director of the Office for Competition and Consumer Protection (that examined unjust contractual clauses on contracts on submission of a complaint). The first interim decision released was given by the District Court of Nicosia.

The Government and Central Bank should provide another approach in appeasing the concerns of borrowers that includes examining bank practices.

The content of this article intends to provide a general guide to the subject matter. Specialist advice should be sought on each particular case.

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